Is Cleanaway a defensive investment?

Can a recent acquisition push the Cleanaway share price higher? We take a fundamental and technical look at the Company.

About Cleanaway

Cleanaway Waste Management (ASX:CWY) provides residential collection services for all types of solid waste streams. These include general waste, recyclables, construction and demolition waste as well as medical and washroom waste (‘Collections’). They also own and manage waste transfer stations and landfills (‘Post Collections’).

The Company recently expanded the operations following the acquisition of Toxfree Solutions (TOX), which was completed on 11 May 2018.

Recent Operating Conditions in Collections appear positive

i. CWY’s recent record of contract wins continues, with the Company announcing to the ASX in mid-October 2018 that is has been awarded the waste services contract for the City of Sydney for seven years starting from 1 July 2019. In addition, the Company has won a contract to undertake logistics for Queensland’s Container Deposit Scheme.

ii. At a Company presentation released to the ASX on 10 October 2018, CWY indicated that it is witnessing signs that the construction boom in Sydney is tapering off. However, it is worth noting that CWY has minimal direct exposure to the construction and demolition waste market in the Sydney region.

iii. The Queensland state government has introduced a landfill level which will be implemented from 4 March 2019. The levy of $70/t is for general waste (municipal solid waste, commercial and industrial; construction and demolition). The implementation of the landfill levy in Queensland (which increases by $5/t for the next four years) is likely to impact the Post Collections segment but benefit the Collections segment.

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Tox Acquisition to Boost Performance of the Liquids & Industrial Services Division

The Liquids & Industrial Services division, which accounts for nearly 30% of group revenue, has recently suffered from a decline in net revenue. This was underpinned by weak demand from the manufacturing and industrial sectors and low oil prices. Despite this period of declining net revenue, the Company has managed to improve earnings as a result of ongoing benefits from cost savings.

Importantly, divisional performance is likely to be boosted by the integration of the TOX acquisition, as this creates synergy opportunities while also reducing the need for CAPEX to upgrade infrastructure. The inclusion of TOX also allows CWY to expand its Industrial Services business by leveraging off an increased pipeline of work in infrastructure and resources.

The Company is confident that it can achieve synergy targets of $35m over 2-3 years, from the integration of the TOX business into CWY. This entails integrating corporate and enterprise services, removing duplication in the operating structure, and optimising the footprint of CWY and TOX sites. Recent Company commentary at the AGM suggest that the integration is on track and performing to plan.

Balance Sheet Has Headroom For Acquisitions

In addition to strong cashflow generation and improving free cashflow, the gearing level of 1.1x remains well below the level at which the Company has previously indicated would be a comfortable gearing level, of 2x. This means that CWY still has substantial headroom to undertake further acquisitions, with CWY likely to target a number of previously-identified small-to-medium sized acquisitions.

Post balance date, the Company announced the acquisition of a 50% interest in a Resource Recovery facility located at Wetherill Park in Western Sydney. This is part of the Company’s strategy to develop waste processing infrastructure assets across the country. CWY has already commenced construction of a resource recovery and transfer station at Erskine Park (NSW) which is licensed to handle 300,000t per annum of putrescible waste.

Fundamental View of Cleanaway

The shares are currently trading on a 1-year forward P/E multiple of ~25x, which we do not consider demanding. This is in light of the defensive nature of the business, a track record in generating costs saving and the expanded scale and earnings uplift that the TOX acquisition has provided the Company, as reflected in mid-to-high double-digit EPS growth for each year from FY19 to FY21. In terms of near-term catalysts for the share price, the Company recently commented at the AGM that “trading so far this [financial] year has been in line with expectations and the Toxfree integration is proceeding as planned.” Further, industry and regulatory conditions remain favourable, with CWY well placed to participate in Energy-from-Waste projects.

Charting View of Cleanaway

The longer term trend is still positive for CWY, however there was quite a bit of price rejection at the highs in August. Since then it has started to trend lower – a short term downtrend within the longer term uptrend. So for the moment it looks like the shares will drift back. We would be close watching what it does near the old swing low around $1.55. If it can stay above that and find support, then that would be a sign that the shares would be ready to buy.

Cleanaway Waste Management (ASX:CWY) weekly chart
Cleanaway Waste Management (ASX:CWY) weekly chart

 

Current share prices available here.

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Michael Gable is managing director of Fairmont Equities.

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